You can compare the real returns on dollar-denominated securities with the real returns on euro-denominated securities. The concept that makes this comparison possible is the expected change in the exchange[more…]

The interest parity can be represented as a curve, called the expected real returns curve or the parity curve. This is one of the curves that can be used to describe the foreign exchange market.[more…]

Combining the money market and the foreign exchange market in the Monetary Approach to Balance of Payment (MBOP) makes it possible to relate the change in the money market of one of the countries to the[more…]

An exchange rate is a relative price because it represents the price of one currency in terms of another currency. Assume that the dollar is the domestic currency and the euro is the foreign currency.[more…]

The real exchange rate (RER) compares the relative price of two countries’ consumption baskets. You may be interested in getting more information than the relative price of two currencies, or the nominal[more…]

Effective exchange rates compare a country’s currency to a basket of other countries’ currencies. The most common way to identify the basket of currencies is to consider a country’s major trade partners[more…]

The percent change formula is a basic but useful tool. You can apply it to any variable that’s observed at various points in time. For all variables for which you want to measure the percent change, use[more…]

When you use the term appreciation or depreciation, make sure you’re referring to currencies that are traded in foreign exchange markets with no government interventions. A country may unilaterally peg[more…]

Most theories of exchange rate determination predict depreciation in the higher-inflation country’s currency. Inflation refers to an increase in the average price level of a country, which is frequently[more…]

The exchange rate between two currencies may be determined in international foreign exchange markets or in a government office. If an exchange rate — say, the yen–dollar rate — is determined in international[more…]